Looking at Foursquare’s $41M Debt Round

For those who don’t know, Foursquare just raised a $41M in multi-year debt from Silver Lake Waterman as well as convertible debt from their existing investors. It is important to note that debt financing means that lenders get paid before investors. Therefore, while it is claimed that this is not a down round, it is certainly not an up round and can be interpreted as at least “not good news”.

Jason Baptiste just posted his thoughts on the bridge round but many (especially those who rely on Foursquare’s API) are concerned. I think that everyone should be concerned about Foursquare’s future.

A little forewarning that the below are very rough estimates.

The word on the street is that Foursquare is burning through cash. With 100 employees, they are likely going through at least $12 – $18M per year on salaries + $10M per year on other operational expenses. I think that Foursquare has burned through at least 85% of their last $50M round. Suffice to say, without this new cash infusion, they’d have less than 8 months of runway. At its current burn, this new $41M cash infusion has pushed out at least 1.5 years of runway for Foursquare.

Foursquare spent up the last $50M pivoting their business to something that is more monetizable than their checkin game. They are now competing directly with Yelp in the local discovery space. This isn’t going to work for them because $50M won’t be enough to outpace Yelp, run current ops AND buy them a huge sales force. Truth is, Yelp still ain’t in the black and had only raised $56M in funding before IPO (source: Crunchbase). Also, Yelp (and Foursquare) only really works in NYC and San Francisco. So that’s a no go on the “obvious” model.

Foursquare needs to make money much faster. They are probably going to monetize on retail or credit card retention. I see them starting to compete directly with ShopKick (who is pushing some serious revenue to its partners). I see them going to Discover card telling them they can decrease credit card churn by 20% through local merchant offers. Although I’m not confident in Foursquare to execute on revenue, I’m sure that it can do at least $10 – $30m in revenue in the next 12 months.

The BIG BIG BIG problem with Foursquare is how non-essential it is. It relies on being cool for usage. People who are addicted to it are addicted to it for status, not utility. If it pushes monetization too hard, it’ll become uncool and people will stop using it and they’ll stop making money.

The new money came in two forms: (1) plain ol’ debt and (2) a convertible note. Debt works in a way that Silver Lake is going to be the first ones paid out if Foursquare is sold at my super rough ~$200M. Fred Wilson at AVC discusses late stage convertible debt:

“…this round is not dilutive to the Foursquare management at this time. But it will be dilutive when the debt converts into equity, most likely at the next equity issuance.”

Convertible debt on a company that has done an equity round means that there are concerns. It provides little if there is an up round (20% discount or cap) but much if there is a down round. It is definitely a product of concerns of the downside. Both USV and a16z are already heavily invested in Foursquare so they’re almost forced to see this one play out.

What’s Foursquare going to look like in the future?

I’m not optimistic on Foursquare. I don’t think they can raise at a $600M+ valuation until they get some serious revenue. It is important to note that they raised their last round in the anticipation of FB’s overhyped IPO. I’d worry about Twitter too but they’re starting to make some serious moolah.

From my experience, I know that the local space is extremely tough without many winners. They are too big to go transactional where local really shines (Exec, Uber, Lyft). They are too small and mobile to be Facebook or Twitter.